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Consumption smoothing among working-class American families before social insurance

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  • Michael G. Palumbo
  • John A. James
  • Mark Thomas

Abstract

This paper examines whether the saving decisions of a large sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop two econometric models to decompose reported annual incomes from micro-data into expected and unexpected components, then we estimate marginal propensities to save out of each component of income. The two methodologies deliver similar regression estimates and reveal empirical patterns consistent with those reported in other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. While these data reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families' saving decisions in the historical period look quite "modern."

Suggested Citation

  • Michael G. Palumbo & John A. James & Mark Thomas, 1999. "Consumption smoothing among working-class American families before social insurance," Finance and Economics Discussion Series 1999-24, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1999-24
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    References listed on IDEAS

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    1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
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    5. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    6. Marjorie A. Flavin, 1991. "The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation," NBER Working Papers 3802, National Bureau of Economic Research, Inc.
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    9. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
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    12. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
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    Cited by:

    1. Motoi Kusadokoro & Takeshi Maru & Masanori Takashima, 2016. "Asset Accumulation in Rural Households during the Post-Showa Depression Reconstruction: A Panel Data Analysis," Asian Economic Journal, East Asian Economic Association, vol. 30(2), pages 221-246, June.
    2. Loretti Dobrescu & Mihaela Neamtu & Dumitru Opris, 2013. "Deterministic and Stochastic Three-Sector Dynamic Growth Model with Endogenous Labour Supply," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 99-111, March.

    More about this item

    Keywords

    Income;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • N31 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - U.S.; Canada: Pre-1913

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